New Energy Efficiency as a Service Model Has Potential to Accelerate Investment in Commercial Buildings
- Jul 27, 2020 8:08 pm GMT
In June 2020 Seattle City Light (SCL) announced that it has selected Gridium, among others, to deliver energy efficiency as a service (EEaaS) to over 1 million square feet of commercial buildings. The first-of-its-kind program, with a regulated utility being involved in an EEaaS agreement, builds on a smaller pilot SCL ran last year. By addressing the long-standing split incentive barrier to energy efficiency, this model could spur rapid growth in the commercial energy efficiency market, but only if other utilities take note.
What Is Energy Efficiency as a Service?
EEaaS agreements are still a relatively new financing mechanism. However, their use is expanding rapidly because they allow customers to forego CAPEX on energy efficiency investments.
In a typical EEaaS agreement, the vendor takes on the performance and financial risk of the transaction and delivers energy efficiency improvements. The client only pays an OPEX-based fee for the service, while the vendor owns, maintains, and operates the energy efficiency equipment to meet savings guarantees. The client benefits from energy savings from day one.
EEaaS addresses two historic barriers to energy efficiency market growth:
- Clients’ hesitance to spend CAPEX or take on debt for efficiency improvements
- Length of time required to realize an ROI
Both of these barriers are typical in other project delivery mechanisms. As a result, EEaaS has been successful in enabling owner-operated commercial sector buildings to make energy efficiency improvements.
The model pursued by SCL takes the EEaaS agreement further by including the utility in the project mix. Under this model, based on the Metered Energy Efficiency Transaction Structure (MEETS), the agreement is made between the utility, the building owner, and the efficiency equipment and services vendor. The renters continue to pay their regular bill, with efficiency included as a line item. The savings are collected by the utility and then shared with the building owner and the vendor.
The model is a win-win-win for the vendor, the utility, and the owner, while being financially neutral for the renter. The utility benefits from revenue growth and reliable and at-scale load resources. Meanwhile, building owners save money and renters’ costs do not rise. Renters and owners also benefit through branding—they now occupy or own more sustainable, efficient, and tech-enabled spaces as a result of the program.
Impact of the Model on the Market
By creating a replicable and scalable model, SCL’s program has the potential to revolutionize how energy efficiency projects are implemented in the commercial built environment.
So far, energy efficiency investment in commercial buildings has been minimal because of the split incentive problem. Buildings owners have not been incentivized to pursue energy efficiency because renters would benefit from reduced energy bills. Only owner-occupied buildings could directly reap the financial ROI of efficiency investments.
By integrating a utility into an EEaaS agreement, this model addresses the split incentive barrier. The utility passes the savings on to the building owner rather than the renter, incentivizing owners to participate in the program.
Other utilities will be watching closely the progress of the program, as many have been eyeing the energy as a service market. If successful, utilities could become the final missing link in solving the energy efficiency incentive dilemma, unlocking opportunity in billions of square feet of commercial building space.
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